We are initiating coverage on First Business Financial Services, Inc. (FBIZ) with an Outperform rating and a six-month price target of $12.00, toward generating a total return of almost 16%.
FBIZ’s year-to-date stock performance has lagged behind the Zacks small-cap bank index, and the company is undervalued, relative to both the index and FBIZ’s historical record, which we don’t believe is justified by its earnings outlook.
We have estimated diluted EPS of $0.90 in 2010, an increase of 120% over 2009’s $0.41, and of $1.25 in 2011, a 39% gain over our 2010 estimate, largely due to growth in net interest income on improved margins and modest loan growth in 2011, as well as slowing deterioration in asset quality in 2010 and slight improvement in 2011, leading to reduced loan loss provisions.
Near-term risks include a halt in the US economic recovery, greater-than-expected asset quality deterioration and increased political risk, with longer-term risks including reliance on the confidence-sensitive brokered deposit market and potential dilution from the sale of additional common stock should loans grow excessively.
A Quick Background
First Business Financial Services, Inc. is a bank holding company headquartered in Madison, Wisconsin, with $1.1 billion in total assets at March 31, 2010. FBIZ specializes in business lending for small-to-medium sized companies with sales ranging from $2-50 million. As an adjunct to these services, FBIZ also offers banking services to business owners, executives, professionals and high net worth individuals, though this is a less significant part of its business.
Banking operations are carried on though two banks, First Business Bank (FBB) located in Madison and First Business Bank-Milwaukee (FBB-Milwaukee), as well as First Business Trust & Investments (FBTI), a division of FBB that offers trust and investment services. FBB also has three loan production offices located in northeast Wisconsin in Appleton, OshKosh and Green Bay.
FBB owns two non-bank subsidiaries that engage in lending that is different than what is typical for banks. First Business Capital Corp. is an asset-based commercial lender that provides secured lines of credit and term loans on equipment and real estate assets, primarily to manufacturers and wholesale distribution companies located throughout the United States. First Business Equipment Finance, LLC is a commercial finance company that finances equipment for small and middle market companies. In addition, the company has four non-bank subsidiaries that help manage other aspects of its business.
Unlike other banks, FBIZ does not have a retail branch network. Instead, the company typically provides custom-tailored banking services to its approximately 2,000 clients at client offices. This has a couple of important implications. First, FBIZ does not have the overhead and expense connected with owning a branch network. Second, FBIZ lacks the in-market deposit base typically associated with a retail ban, and must fund a significant part of its operations through the wholesale-brokered deposit market.
The Company’s Focus
The loan portfolio has a concentration in commercial real estate, accounting for 52% of total loans at March 31, 2010. The rest of the lending book consists of commercial and industrial (accounting for 25% of total gross loans), construction and land development (7%), 1-4 family (6%), multi-family (5%), commercial financing leases (3%), and consumer and other (2%).
Almost all loans are secured, usually by real estate, inventory, accounts receivable, equipment, machinery, or corporate assets. The liquidity portfolio, consisting of cash, short-term investments, and US agency mortgage obligations, has increased on a relative basis, and is now a solid 20% of total assets (up from 14% a year ago). Transaction and money market accounts accounted for 43% of total deposits at March 31, 2010, with certificates of deposit (CDs) at 8%, and brokered CDs at 49% (down from 57%, 15 months ago).
In 2009, net interest income contributed 81% of net revenue. Other significant net revenue sources include trust and investment services fee income (5 ½% of net revenues), services charges on deposits (4 ½%), loan fees (3%), and increase in cash surrender value of bank-owned life insurance (2%). FBIZ’s 2010 business plan includes: (1) improving the overall quality of its loan portfolio, (2) minimizing loan loss specific reserves and charge-offs, (3) generating organic growth in the loan portfolio, and (4) increasing its market share of in-market core deposits.
Read the full analyst report on “FBIZ”
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